As the Trade War tension heats up this summer, another type of battle is playing out on the soccer field at the World Cup. While the tournament started with 32 teams, the field has narrowed down to the final two – France and Croatia – in a clash for supremacy. While fans across the world are in a frenzy, the economics of the sport suggests there’s more on the line than simple pride and joy. Looking at data over the past 40 years, World Cup Champions tend to provide an immediate, short-term economic boost to a winning nation’s economy.
Aligned with the spike in consumer sentiment and euphoria surrounding a World Cup victory, the winning nation’s stock market tends to spike, outperforming global markets by 3.5% in the month following the conquest. This may be due to a surge in retail sales and consumer spending as a victory creates an ebullient mood within a winning country. In fact, over the past month, England’s unexpected success has brought forth millions of pounds worth of consumer spending. During their recent semifinal match against Croatia, the Centre for Retail Research (CRR) expected that £555 million worth of spending was injected into the economy as fans boost food, drink, memorabilia and even TV sales. Had England been able to survive and defeat Croatia, the CRR had forecasted an additional £2.7 billion in spending, boosting the economy. The overjoyed boost to Consumer Sentiment undoubtedly explains this phenomenon as consumers increase purchases on items they otherwise wouldn’t buy. In fact, even the governor of the Bank of England, Mark Carney pointed out last week that winning the world cup would give the UK an “unadulterated” boost from the “feel-good factor” among consumers, lending credibility to this phenomenon.
However, the picture doesn’t look at rosy as this short-term euphoria doesn’t quick last multiple years. In fact, World Cup winners’ stock market actually underperforms by 4% over the 12 months following the spike, according to research by Goldman Sachs. That is, these gains are not sustainable, suggesting that consumers simply “pull-forward” their spending purchases from subsequent months, balancing their budget by reducing spending by less than normal later in the year. In economic parlance, this would be termed the “substitution effect” as consumers increase their spending in one time period only to reduce it in a future time period. Unlike an increase in salary, unexpected bonus or generous tax break which are permanent catalysts that can boost spending, the surge in consumer euphoria from World Cup Fever is only temporary and not longer-lasting.
Does it Hosting the World Cup Boost a Country’s Economy?
While winning the World Cup engages consumers to spend more from their personal wallets, hosting the world’s grandest sporting event brings multi-billion dollar investment spending over a number of years. Undertaking the privilege of hosting a World Cup can lead to burdensome financial costs for an event that only lasts a month. However, the upshot is a country with revamped infrastructure from airports, buildings and trains to subways, highways and hotels. For this year’s tournament alone, it is reported that Russia spent over $14 billion in development costs (the most in history), much of which may never be recouped from tangential benefits. So this begs the logical follow-on question – does hosting the World Cup boost a country’s economy and is it a profitable endeavor?
The answer is that it depends. The profit/loss calculus is dependent entirely on the starting level of a host country’s infrastructure. Should a host country already have a satisfactory arsenal of sports arenas and don’t need much groundbreaking construction, the major costs can be reduced, shifting the calculus of hosting towards a profitable venture. On the other hand, if a government needs to build a cadre of new stadiums without a tenable future plan for the arenas, such as Brazil in 2014, the outcome could be an unmitigated economic disaster. Needless to say, as a rule of thumb, big sporting events are typically net positive for more developed countries whereas developing nations might struggle to return a profit.
In general, the biggest cost of hosting a World Cup is building the infrastructure to accommodate hundreds of thousands of fans. However, other than stadiums, many of these are worthwhile long-term investments that pay dividends toward the long-run trajectory of an economy. These productivity-generating infrastructure developments include airports, trains and public transportation, all of which can increase potential GDP over a number of years, if not decades. In general, the bulk of the economic impact from hosting a World Cup comes from the construction of and significant improvements to public infrastructure.
On the revenue side, a host World Cup nation can reap bountiful returns in a variety of ways. Tourism is the obvious answer with ticket sales, hotel accommodations, travel and tourist spending bringing an immediate influx of revenue. In addition, the branding and recognition of a host country can bring more foreign investors and integration within the international business community if it’s still developing. Finally, the public investment into infrastructure can produce a recurring revenue stream, such as toll-roads for highways, or increased prices justified by better quality service. In South Africa, after hosting the 2010 World Cup, international tourist arrivals grew at an annual rate of 7.4% percent over subsequent years, welcoming nearly 10 million foreign travelers, a significant step up in South Africa’s tourism industry.
Preparing for the Euphoria
Whether it’s France (population: 67 million) or Croatia (population: 4 million) taking home the World Cup Trophy, expect jubilant fans in each country to consume more than their typical amount over the summer holidays. While this exuberance of spending will only be short-lived, consumers may substitute future spending for the current day. In terms of sheer size of their populations, it’s self-evident that a victory by the French team will boost aggregate GDP in Europe as a whole. Based on population size, this tilt looks to be a David versus Goliath affair, but each nation can foreseeably lift the trophy. It promises to be a fantastic ending to a phenomenal tournament over the past month. As a simple relative value trade, look for either the French CAC 40 Index or the Croatian Stock Exchange to outperform the overall Global MSCI Index over the next month.